D The dynamics of market credit for low-end consumers

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A recent Wall Street Journal article examined how the Federal Reserve's use of low interest rate policies has failed to reach those most in need. Aptly calling it the "credit divide," the article finds that "Fed officials have been so frustrated in the past year that low interest rate policies haven't reached enough Americans to spur stronger growth, the way economics textbooks say low rates should."

That conclusion is of no surprise to many, especially to the 73 million un-banked and under-banked Americans who don't even figure into the Feds' equation. Extending credit to these individuals has never been seen as a meaningful contributing factor to the overall health of the economy. Sure, there have been special initiatives like the FDIC's small dollar loan program a few years back, which by all measurable accounts failed, not because banks weren't willing to participate in the pilot program, but because without FDIC incentives, banks simply couldn't make money.

Yet, we have 73 million men and women who live with the constant fear that a financial hiccup will trigger a need for money they don't have and most likely can't get. While the Fed is making easy money, it's going to those with near-perfect credit scores, which leaves many of these 73 million Americans scrambling for other options. In other words, while interest rates are at an all-time low, money still isn't available to those who need it the most.

In a recent study, "Serving Consumers' Needs for Loans in the 21st Century," author Michael Flores finds that neither banks nor alternative financial services providers are extending loans in the $750 to $5,000 range. Despite benefiting from the Fed's easy money, loans of under $5,000 simply aren't profitable for banks. Even if such loans were to exist, many customers wouldn't qualify. On the other hand, alternative financial services (AFS) providers can't fill the space because of the burdensome costs of complying with 50 distinct sets of state regulations.

Still, Flores suggests it is AFS providers who are in a better position to extend credit to low- to-moderate-income consumers because they have built a more efficient and technology-driven model, but only if regulators can come up with a new banking model. The AFS market is currently limited mostly to payday loans, pawns or titles. With the right regulatory framework, however, AFS providers are capable of expanding into longer-term credit options better suited for many consumers' needs.

It all comes down to a commitment in Washington to focus some of that monetary policy on closing the ever-widening gap between the "haves and the have-nots." However, it will take looking beyond banks as the answer to delivering credit to the 73 million Americans who are on the wrong side of the credit divide.

Allocating credit to those who need it is a complex subject. It's a mistake to think all commercial banks have the expertise to undertake the credit analysis to make and service all kinds of loans. A bank analyst who understands the credit issues of an oil and gas exploration company is unlikely to have the expertise to analyze an auto consumer loan. Like other industries, the financial industry tends to specialize in various market segments.